What Is a Fiduciary Relationship?

If you run or are setting up a small business in the UK, you’ll come across the term “fiduciary relationship” sooner or later - especially when you appoint directors, form a partnership, or ask a third party to act on your behalf.

It can sound like legal jargon, but it’s actually a practical concept that affects everyday decisions: who owes duties to whom, what conflicts you must avoid, and what happens if trust is abused.

In this guide, we’ll break down what a fiduciary relationship is, when it arises in a business context, the duties involved, the risks if things go wrong, and the steps you can take to stay protected from day one.

What Does “Fiduciary Relationship” Mean?

A fiduciary relationship is a legal relationship of trust and confidence where one person (the fiduciary) undertakes to act for or on behalf of another (the beneficiary or principal) in circumstances that give rise to duties of loyalty and good faith.

In plain English: a fiduciary must put the other party’s interests ahead of their own on the matters within the scope of that relationship.

Key features usually include:

• One party is entrusted with power or discretion affecting the other’s interests.
• There’s a reasonable expectation of loyalty, confidentiality and honesty.
• The fiduciary must not profit from their position or let personal interests conflict with their duties, unless properly authorised.

Fiduciary obligations are common in business, but they don’t exist in every commercial relationship. Most supplier–customer relationships, for example, are arm’s-length and governed by contract, not fiduciary duties. The label depends on the substance of the relationship - who holds power and whether trust and loyalty are at its core.

Typical Fiduciary Relationships In Small Businesses

Here are common scenarios where fiduciary duties often arise for SMEs in England and Wales.

Company Directors

Directors owe fiduciary-style duties to the company under the Companies Act 2006 (sections 171–177) and at common law. These include duties to act within powers, promote the success of the company, exercise independent judgment, avoid conflicts, and not accept benefits from third parties relating to their position.

These obligations apply to de jure directors (formally appointed), de facto directors (acting as directors without formal appointment) and, in some cases, shadow directors (if the company’s directors are accustomed to act on their instructions).

It’s good practice to capture expectations, authority and conflict procedures in a clear Directors’ Service Agreement, alongside your company’s articles.

Partners

Partners in a traditional partnership owe fiduciary duties to one another and to the partnership. This includes a duty of utmost good faith and to account to the partnership for any profit made from partnership opportunities, unless the other partners agree otherwise.

If you’re trading as a partnership (rather than a company or LLP), make sure your Partnership Agreement sets out profit sharing, decision-making, conflict management, and what counts as a partnership opportunity. This helps avoid ambiguity and reduces the risk of expensive fallouts.

Agents

When you appoint someone to act on your behalf - to negotiate, sign, or manage relationships - you’re creating an agency. Agents typically owe fiduciary duties to their principal: to act within authority, avoid conflicts, not make secret profits, and keep the principal’s information confidential.

Because agency arrangements are so common in small business, it’s important to understand how agency relationships work and to use a properly drafted agreement that limits authority, clarifies remuneration, and deals with conflicts and termination.

Trustees

If your business uses a trust (for example, to hold property or shares), the trustee owes strict fiduciary duties to the beneficiaries. Trustees must act in accordance with the trust deed, avoid conflicts, and not benefit personally unless allowed.

Senior Employees And Consultants

Employees owe a duty of fidelity (to be faithful to their employer). Senior employees, key account managers and executives may owe additional fiduciary obligations, depending on their role and the level of trust and discretion they exercise.

External consultants are usually governed by contract, but where the consultant has discretion to act on your behalf and occupies a position of trust, fiduciary duties can arise. Clear documentation - whether an Consulting Agreement or an Employment Contract - helps define scope, authority and confidentiality to avoid uncertainty.

What Are The Core Fiduciary Duties?

Fiduciary duties are about loyalty. While the exact content depends on the relationship and context, the core duties commonly include:

• Duty to Avoid Conflicts of Interest: The fiduciary must avoid situations where their personal interests, or duties owed to another, conflict with their duties to the beneficiary. For company directors, this is codified in the Companies Act 2006.
• Duty Not To Profit From Position: The fiduciary must not make any secret profit or take a business opportunity that belongs to the beneficiary, unless fully disclosed and properly authorised.
• Duty of Confidentiality: Information acquired in the course of the relationship can’t be misused for personal gain or disclosed without authority. Using a robust Non-Disclosure Agreement (NDA) and embedding confidentiality clauses in your key contracts supports this duty.
• Duty To Act In Good Faith And For Proper Purpose: Decisions and actions must be taken honestly, in the interests of the beneficiary, and for the purposes for which authority was granted.
• Duty To Account: A fiduciary must account for any benefit obtained in breach of duty and keep proper records of property or money handled on the beneficiary’s behalf.

Alongside these loyalty-based duties, certain roles also carry a duty of skill and care (for example, directors must exercise reasonable care, skill and diligence). That sits alongside, and is distinct from, fiduciary obligations.

Real-World Examples

• A director learns, through their role, that a major client wants to place a large order. They secretly divert the opportunity to a personal side company. That’s likely a breach of the no-profit and conflict duties.
• A sales agent takes undisclosed commission from your supplier in exchange for steering purchases their way. Secret commissions are a classic fiduciary breach - you could demand an account of profits and terminate for cause.
• A partner sets up a competing venture and uses partnership contacts and information to win work. Without authorisation, that’s likely a breach requiring them to account to the partnership.

How To Manage Conflicts And Avoid Accidental Fiduciary Obligations

Fiduciary duties can arise even if you didn’t use the word “fiduciary” in your contract. Courts look at substance over labels: is there trust, discretion and dependency? To manage risk, design your relationships intentionally and document them clearly.

1) Use The Right Structure

Deciding whether to trade via a company, partnership or joint venture will influence who owes duties and to whom. For example, a partnership creates strong mutual fiduciary obligations between partners; a corporate joint venture typically relies more on contract.

If you’re collaborating with another business, consider whether a corporate JV structure makes more sense than a partnership. Our comparison of joint venture vs partnership highlights the practical differences, including how fiduciary obligations can arise.

2) Bake In Conflict Controls

Good governance prevents problems. Put clear conflict processes in your constitutional and contractual documents. Practical inclusions include:

• Disclosure requirements for conflicts and personal interests.
• Independent approval for conflicted transactions (e.g., board approval without the conflicted director voting).
• Limits on outside appointments or competitive activities.
• Register of interests and regular declarations.

Codifying these steps in a Conflict of Interest Policy and your board procedures helps demonstrate that you’re taking reasonable steps to manage risks.

3) Define Authority And Scope In Contracts

If you appoint someone to act for you, limit their authority to what’s necessary and put guardrails around it. In agency and distribution scenarios, your agreement should:

• Specify what the agent can and cannot do (e.g., no authority to bind you above a set value).
• Clarify remuneration, expenses and whether any third-party payments are allowed.
• Prohibit secret commissions and require full disclosure of any potential conflict.
• Set out records, reporting and audit rights.
• Include strong confidentiality and IP protection clauses.

For co-owner relationships, a well-drafted Shareholders Agreement or Partnership Agreement is essential. These documents address decision-making, restraints of trade, good leaver/bad leaver outcomes, and processes to approve related-party deals - all of which reduce fiduciary risk.

4) Avoid Creating An Unintended Partnership Or Agency

Be careful with how you describe and run collaborations. If you operate like partners (sharing profits, holding yourselves out as partners) without a formal structure, a partnership can arise by conduct - bringing fiduciary duties with it.

Similarly, allowing a reseller to negotiate or sign on your behalf without clear limits can create an agency. Make sure your contracts include “no partnership” and “no agency” clauses where appropriate and align your day-to-day behaviours with that intention.

5) Obtain Proper Authorisations

Some fiduciary duties can be modified or authorised if the beneficiary gives informed consent - for instance, if shareholders approve a conflict after full disclosure. Build transparent approval processes into your governance documents so you can manage conflicts lawfully and efficiently when they arise.

What Happens If Fiduciary Duties Are Breached?

Breaches of fiduciary duty are taken seriously by UK courts because they involve betrayal of trust. The remedies are designed to strip unauthorised gains, restore the beneficiary’s position, and deter misconduct.

Common Remedies

• Account of Profits: The fiduciary must hand over profits made from the breach, regardless of whether the beneficiary suffered a direct loss.
• Constructive Trust: Assets acquired through the breach can be treated as held on trust for the beneficiary.
• Equitable Compensation: Financial compensation for losses caused by the breach (distinct from ordinary contractual damages).
• Injunctions: Court orders preventing a threatened breach, such as stopping misuse of confidential information.
• Rescission: Unwinding a transaction tainted by a fiduciary breach or conflict.
• Disqualification And Removal: Directors can be removed and, in serious cases, disqualified from acting as a director.

Practical Risk Areas For SMEs

• Corporate Opportunities: Directors or senior staff diverting business opportunities to themselves or a competitor.
• Undisclosed Commissions: Agents or employees receiving secret kickbacks from suppliers or customers.
• Side Ventures: Partners setting up competing businesses using shared know-how or client lists.
• Confidential Information: Misuse of trade secrets, pricing strategies or product roadmaps for personal gain.

Addressing these risks upfront with the right contracts, policies and training is far easier (and cheaper) than trying to fix them in litigation later.

How Disputes Usually Play Out

When a potential breach is discovered, typical first steps include: gathering evidence, suspending the wrongdoer’s access, sending a letter before action, and seeking urgent undertakings. If matters escalate, you might apply for an injunction or pursue claims for an account of profits and compensation.

Because remedies can be very fact-specific and time-sensitive (e.g., preserving evidence, stopping ongoing misuse), it’s wise to get tailored advice quickly if you suspect a breach.

Practical Steps And Key Documents

Here’s a practical checklist to help you manage fiduciary risks in your business:

• Pick The Right Structure: Decide early whether you’ll operate as a company, partnership, LLP or JV - this shapes who owes fiduciary duties. If collaborating, review whether you need a corporate structure rather than an informal arrangement.
• Define Roles Clearly: Use role descriptions and board charters to clarify who can do what, especially for director and senior management roles.
• Document Authority & Limitations: In your agency, distribution or sales arrangements, include authority limits, reporting, and strict rules around commissions and conflicts.
• Put Governance On Paper: Adopt a Conflict of Interest Policy, set up interest registers, and schedule regular declarations and training.
• Protect Information: Use NDAs with third parties and robust confidentiality clauses with staff and consultants. A Non-Disclosure Agreement is a simple, effective baseline.
• Co-Owner Agreements: Make sure you have a Shareholders Agreement (or a Partnership Agreement) that addresses conflicts, related-party transactions, restraints of trade and exit mechanisms.
• Appoint Directors Properly: Set expectations in a Directors’ Service Agreement and ensure your articles align with your governance approach.
• Clarify Consultant And Employee Relationships: Use a Consulting Agreement or Employment Contract that defines scope, authority and confidentiality.
• Avoid Accidental Relationships: For collaborations, be clear if there is no partnership or agency; consider the structural differences highlighted in joint venture vs partnership guidance.
• Create A Reporting Culture: Encourage early disclosure of potential conflicts, and make it normal to ask for approval rather than forgiveness.
• Plan For Breaches: Have an escalation playbook: suspend access, secure data, document evidence, and seek urgent advice if you suspect wrongdoing.

It can feel like a lot of moving parts - and that’s normal. The good news is that once you have the core documents and processes in place, you’ll have a strong framework that both deters problems and makes it easier to act quickly when issues arise.

Key Takeaways

• A fiduciary relationship arises where one party undertakes to act for another in a context of trust and discretion, triggering duties of loyalty and good faith.
• Common fiduciaries in small businesses include directors, partners and agents; senior employees and consultants may also owe fiduciary duties depending on their role and authority.
• Core duties include avoiding conflicts, not making secret profits, maintaining confidentiality and acting for proper purposes - breaches can lead to account of profits, injunctions and other serious remedies.
• Design your relationships deliberately: choose the right structure, define authority in contracts, and put conflict controls and confidentiality protections in place.
• Essential documents include a Shareholders Agreement or Partnership Agreement, Directors’ Service Agreement, NDAs, and clear agency or consulting agreements - these set expectations and reduce risk.
• If you suspect a breach, act quickly to preserve evidence and get advice - time can be critical for injunctions and recovery of assets or profits.

If you’d like tailored help setting up the right governance, contracts and protections for your business, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.